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Securities and Exchange Commission
Investment Company Act Release No. 13840
TRAVELERS EQUITIES FUND, INC., et al.; NOTICE OF APPLICATION
812-5742
March 22, 1984
Agency: Securities and Exchange Commission ("Commission").
Notice is hereby given that Keystone Custodian Funds, Inc. ("Keystone"), One Tower Square, Hartford, Connecticut 06115, the corporate trustee of Keystone Custodian Fund, Series K-2 ("Series K-2"), Series K-2 and Travelers Equities Fund, Inc. ("TEFI") ("Applicants"), both open-end, diversified management investment companies registered under the Investment Company Act of 1940 ("Act"), filed an application on January 11, 1984, and an amendment thereto on February 24, 1984, for an order of the Commission (1) pursuant to Sections 6(c) and 17(b) of the Act, exempting certain transactions incident to the reorganization of TEFI and Series K-2 from the provisions of Section 17(a), 19(b), and 22(c) of the Act and Rules 19b-1 and 22c-1 thereunder, and (2) pursuant to Section 17(d) of the Act and Rule 17d-1 thereunder, permitting the proposed reorganization. All interested persons are referred to the application on file with the Commission for a statement of the representations contained therein, which are summarized below, and to the Act for the text of the provisions cited in the application.
Applicants state that TEFI was organized in 1968 as a Maryland corporation the investment objective of which is primarily the long-term appreciation of capital and secondarily the growth of income without emphasis on obtaining short-term trading profits. It is stated that, as of December 31, 1983, TEFI had net assets of approximately $49.3 million and approximately 5,000 shareholders. Applicants state further that Series K-2 was organized in 1935 as a Pennsylvania unincorporated common law trust the investment objective of which is capital growth. Applicants state that, as of December 31, 1983, Series K-2 has net assets of approximately $141.9 million and approximately 22,000 shareholders.
Applicants propose that Series K-2 acquire all of the assets of TEFI in the manner set forth in an Agreement and Plan of Reorganization (the "Agreement") between Keystone on behalf of Series K-2 and TEFI. Applicants state that, under the terms of the Agreement, on a closing date (the "Closing Date"), Series K-2 will acquire all of the assets of TEFI in exchange for shares of Series K-2 and the assumption of all of the liabilities of TEFI by Series K-2. Applicants represent that each TEFI shareholder will be entitled to receive that proportion of Series K-2 shares to be received by TEFI that the number of TEFI shares owned by such shareholder bears to the number of TEFI shares outstanding on the date of exchange.
Applicants state that full shares and, to the extent necessary, a fractional share of Series K-2 equal in aggregate net asset value to the aggregate net asset value of TEFI, adjusted as described below, are to be issued by Series K-2 in exchange for the net assets of TEFI. The value of the exchanged Series K-2 shares and TEFI's assets acquired by Series K-2 will be determined using the valuation procedures applicable to the net assets of Series K-2 as set forth in its trust agreement and then current prospectus.
Applicants state that Keystone has agreed to provide, at no cost to the shareholders of TEFI, account insurance to all individual shareholders of TEFI on the Closing Date who continue to maintain their investments and reinvest all dividends and capital gains distribution on Series K-2 shares which they receive in connection with the reorganization. The insurance is intended to guarantee that the value of former TEFI shareholders' Series K-2 accounts on the date of death will be no less than the value of their TEFI accounts on the Closing Date, reduced by the proportionate amounts of any redemptions in their Series K-2 accounts. Applicants state that they deem this insurance arrangement not to require exemptive relief under Section 17(d) of the Act and that therefore they are seeking no such relief in their application.
Applicants state that TEFI and Series K-2 each have agreed to declare a dividend to their respective shareholders prior to consummation of the reorganization of all of their respective undistributed investment company taxable income and any net realized capital gain (to the extent not offset by a capital loss carryover) through the Closing Date. Applicants state that if not making such a distribution by Series K-2 would not materially adversely affect shareholders of TEFI in the reorganization, then any such net realized capital gain will not be distributed by Series K-2.
As a result of the reorganization, TEFI shareholders will be allocated a portion of the net unrealized appreciation in the portfolio of Series K-2. Accordingly, for purposes of Series K-2's acquisition of TEFI's assets, Applicants will make an adjustment to compensate TEFI shareholders for any additional capital gains tax payable after the reorganization resulting from Series K-2's realization of unrealized appreciation in its portfolio attributable to periods before the reorganization. Applicants state that such adjustment will be made according to the Agreement by calculating the "opportunity cost" to shareholders of an assumed amount of tax payable on a portion of the change in unrealized appreciation experienced by shareholders. Applicants state that the calculated opportunity cost will be reflected in the number of shares issued by Series K-2 for the acquisition of the net assets of TEFI. Applicants state further that, as of December 31, 1983, TEFI had $1,097,000 of net unrealized appreciation on investment and Series K-2 had $35,374,000 of net unrealized appreciation on investments. Applicants submit that, if the proposed transaction had occurred on December 31, 1983, the amount of the adjustment would have been $252,558 or approximately plus $.055 per share to TEFI and less $.013 per share to Series K-2.
Applicants state that Series K-2 will assume all liabilities of TEFI in connection with the acquisition of its assets and that Series K-2 will bear the fees and expenses incurred by it in connection with the reorganization. The Travelers Corporation ("Travelers") will bear the fees and expenses incurred by TEFI in connection with the reorganization, except the expenses of independent counsel to the non-interested directors of TEFI. It is expected that the reorganization will be submitted for approval by the holders of two-thirds of the outstanding shares of TEFI and that the acquisition, if approved, will be consummated shortly thereafter.
Applicants state that Travelers Investment Management Company is investment adviser for TEFI. In addition, approximately 35 percent of the outstanding shares of TEFI are beneficially owned by Travelers. The Massachusetts Companies, Inc. ("MassCo"), also a wholly-owned subsidiary of Travelers, beneficially owns 28 percent of the outstanding shares of TEFI. Keystone, a wholly-owned subsidiary of Travelers, is the corporate trustee of Series K-2. Applicants submit that they may be deemed to be affiliated persons of each other for purposes of the prohibitions of Sections 17(a) (1) and (2) of the Act. In addition, the proposed reorganization may be deemed to involve a joint enterprise or other joint arrangement for purposes of Section 17(d) of the Act and Rule 17d-1 thereunder.
Applicants state that TEFI and Series K-2 have each made a distribution of realized capital gains to shareholders following their most recent fiscal year ends. The Agreement provides that TEFI and Series K-2 will distribute to shareholders prior to the Closing Date any investment company taxable income and net realized capital gains. Applicants submit that, to the extent that such distribution involves the distribution of capital gains more often than once every twelve months, it would be prohibited by Section 19(b) and Rule 19b- 1 thereunder.
The Agreement provides that shares of Series K-2 will be issued on the Closing Date at their then net asset value in exchange for assets of TEFI, subject to the adjustment based on the amount of net unrealized appreciation in the portfolios of TEFI and Series K-2. Applicants submit that the issuance of shares of Series K-2 in the manner provided by the Agreement may be deemed to violate the provisions of Section 22(c) of the Act and Rule 22c-1 thereunder.
Applicants assert that the terms of the proposed reorganization are consistent with the standards of Sections 6(c) and 17(b) of the Act and Rule 17d-1 under the Act. The Board of Directors of TEFI, including a majority of the directors who are not interested persons of TEFI or Series K-2, has approved the proposed reorganization and recommended that it be submitted to TEFI's shareholders for approval. Applicants assert further that the Board of Directors of Keystone including those who have in various other contexts performed the functions of independent directors of Series K-2, has approved the proposed reorganization. The Boards of Directors of TEFI and Keystone have further determined that an adjustment to reflect the difference in the amount of unrealized capital appreciation in the portfolios of TEFI and Series K-2 is appropriate. Applicants assert that, in connection with its approval of the proposed reorganization and its decision to recommend the transaction to shareholders for approval, the Board of Directors of TEFI also considered the continued viability of TEFI. The directors were concerned with the continuing net redemptions experienced by TEFI, with its small size and sales load structure, and with TEFI's continued ability to obtain high-quality management services without increases in the costs of such services to shareholders. The Board of Directors also considered the fact that the reorganization could result in higher expenses to TEFI shareholders. However, Applicants submit that shareholders of TEFI will become shareholders of a large and growing fund with an experienced, well-respected investment manager, improved investment performance and an active, viable distribution program. Applicants assert that shareholders of TEFI can also be expected to benefit indirectly from the greater diversification of security holdings possible in a portfolio of Series K-2's size.
Applicants represent further that the advantages of the proposed reorganization to shareholders of TEFI outweigh any disadvantage in the structural differences between TEFI and *12351 Series K-2. Applicants state that, whereas TEFI shareholders have one vote per share on all matters on which shareholders vote under Maryland law or the Act, Series K-2 shareholders have one vote per share only on certain matters. Applicants state that, although Series K-2 shareholders are not called upon to approve the continuance of Keystone as corporate trustee, Series K-2 shareholders have the voting rights provided by Sections 13(b), 16(c) and 32(a) of the Act.
Applicants asssert that the proposed reorganization is in the interest of Series K-2 shareholders because despite the absence of immediate monetary savings, the increase in Series K-2's net assets resulting from the reorganization could possibly reduce management fees and permit greater diversification of investment. Applicants state that Series K-2 will increase its assets without incuring the transaction costs incident to investing a comparable amount of cash.
Applicants assert that the proposed reorganization is consistent with the policies of Series K-2 and TEFI. Applicants state that the primary investment objective of each fund is capital growth and that the investment policies and restrictions of Series K-2 and TEFI are similar. Applicants represent that securities in the investment portfolio of TEFI are suitable investments for Series K-2. Applicants represent further that no realignment of TEFI's portfolio will occur prior to the reorganization and TEFI's shareholders will not incur any brokerage expense in connection with the reorganization. Applicants represent that securities received by Series K-2 as a result of the reorganization will be held for investment until they are sold in the ordinary course of portfolio management for investment purposes.
Applicants state that compliance with Rule 17a-8 under the Act would exempt them from the prohibitions of Section 17(a) of the Act if the possibility of such compliance were not negated by Travelers' and MassCo's ownership of TEFI shares and Travelers' and Keystone's possible status as separate investment advisers. Nevertheless, the Boards of Directors of TEFI and Keystone have made the determinations required by Rule 17a-8 under the Act. Applicants assert that Travelers will vote its TEFI shares in the same proportion that the publicly- held TEFI shares are voted on the transaction. Applicants submit that granting the requested relief from Section 22(c) of the Act and Rule 22c-1 thereunder is consistent with the exemptive standards of Section 6(c) of the Act. Applicants submit that if Rule 17a-8 under the Act were available to them, exemptive relief from the provisions of Rule 22c-1 under the Act would not be required because Rule 22c-1(a)(2) under the Act provides that Rule 22c-1 shall not prevent any registered investment company from adjusting the price of its redeemable securities sold pursuant to a merger, consolidation or purchase of substantially all of the assets of a company, which meets the conditions specified in Rule 17a-8 under the Act. Applicants submit that they have met the conditions of Rule 17a-8 under the Act and that granting the requested relief from Section 22(c) of the Act and Rule 22c-1 thereunder is appropriate.
Applicants assert that granting the requested exemption from the provisions of Section 19(b) of the Act and Rule 19b-1 thereunder is also appropriate under the exemptive standards of Section 6(c) of the Act. Applicants state that Section 19(b) of the Act is designed to prevent realized capital gains from being distributed to shareholders in a manner indicating such capital gains distributions to be part of regular dividends from investment income. Applicants propose to distribute any investment company taxable income and realized capital gains prior to the Closing Date. Applicants represent that the distributions would be made in connection with the reorganization for tax and accounting purposes. Accordingly, Applicants submit that the distribution of any net realized capital gains to TEFI and Series K-2 shareholders prior to the reorganization will not result in any of the abuses addressed by Section 19(b) of the Act and Rule 19b-1 thereunder.
Applicants assert that the terms of the proposed reorganization are fair and reasonable and do not involve overreaching on the part of any person concerned and that the proposed reorganization is consistent with the policies recited in Applicants' respective registration statements and reports filed under the Act and with the general purposes of the Act. Applicants further submit that the participation of TEFI and Series K-2 in the proposed transaction is consistent with the provisions, policies and purposes of the Act and is not on a basis different from or less advantageous than that of other participants.
Notice is further given that any interested person wishing to request a hearing on the application may, not later than April 16, 1984, at 5:30 p.m., do so by submitting a written request setting forth the nature of his/her interest, the reasons for the request, and the specific issues of fact or law that are disputed, to the Secretary, Securities and Exchange Commission, Washington, D.C. 20549. A copy of the request should be served personally or by mail upon Applicants at the address stated above. Proof of service (by affidavit or, in the case of an attorney-at-law, by certificate) shall be filed with the request. After said date, an order disposing of the application will be issued unless the Commission orders a hearing upon request or upon its own motion.
For the Commission, by the Division of Investment Management, pursuant to delegated authority.
George A. Fitzsimmons,
Secretary.
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